Exam 14: Capital Structure and Dividend Policy Decisions

The benefit to the firm of the tax deductibility of interest can be lowered if the firm's marginal tax rate is reduced by accumulated depreciation or tax-loss carry-forwards.

Asymmetric information involves a situation where the firm's managers have different (better)information about their firm's prospects than do investors.

If you were to argue that the firm's cost of equity,r_s,increases as the dividend payout decreases,you would be making an argument ____ with MM's dividend irrelevance theory,and ____ with the theory that investors prefer dividends received in the current period rather than capital gains received in the future.

Business risk will not affect a firm's beta,because beta is determined by the market and thus is outside the control of the firm.

As the debt-to-assets ratio rises,the WACC is reduced because the after-tax cost of debt is usually lower than the cost of equity.What limits the substitution of debt for equity in the capital structure is that as the debt-to-assets ratio rises,the costs of both components eventually increase.

If the announcement of a stock sale does in fact trigger a decline in stock price,this reinforces the effects of flotation costs incurred with new equity issues.Further,this implies a larger break in the MCC schedule.

The higher a firm's time-interest-earned ratio,the higher the probability that the firm will default on its debt and experience financial distress.

If a firm adheres strictly to the residual dividend model,a sale of new common stock by the company would suggest that

Business risk is the single most important determinant of a firm's capital structure.

Which of the following statement completions is correct? If investors prefer dividends to capital gains,then

A firm's capital structure and dividend policy can affect the firm's cash position but has no impact on the market value of the firm's stock.

If you own 100 shares in a company that announces a 2-for-1 stock split (with no other announcement),you should

In the real world,we find that dividends

Debt has benefits for firms because interest is tax deductible.As long as a firm has positive earnings it can receive the full benefit of the tax deductibility of debt interest expense.

If the firm's actual debt-to-assets ratio is below its target level,expansion capital should be raised by issuing equity in order to preserve the firm's borrowing capacity.

The announcement of a stock offering by a mature firm that seems to have financing alternatives is taken as a signal that the firm's prospects are very good.

If debt financing is used,which of the following is correct?

If the debt-to-assets ratio is 50 percent,the interest rate on all debt is 8 percent,the tax rate is 50 percent,and the return on equity is 10 percent,then the ratio of earnings before interest and taxes (EBIT)to total assets,or the basic earning power ratio,must be

Given the information below,calculate the expected growth rate (g)of dividends,using the constant growth model Beta = 1.75;r_RF = 7 percent;r_M = 11 percent;dividend payout ratio = 30 percent;r_d = 10 percent (paid)on all long-term debt;P/E ratio = 10;sales = 5,000 units;sales price per unit = $5;variable cost per unit = $2;fixed cost = $1,000;common stock shares outstanding = 5,000;long-term debt outstanding = $10,000;tax rate = 40 percent.Assume equilibrium exists in the market.

The degree of financial risk is the single most important determinant of a firm's capital structure.